[BIP-648] Balancer DAO Financial Reporting by karpatkey

Service Providers Funding Proposals
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PR with Payload

Abstract

We propose the establishment of a financial reporting system for Balancer DAO’s assets. This system will deliver insights into the DAO’s financial status, aiding strategic decision-making.

In the initial phase, we will offer analytics and insights into the treasury. Based on the DAO’s goals and community feedback, we will refine the system to align with the needs of the community and Maxis.

Motivation

Karpatkey has been serving as Balancer DAO’s treasury manager, aiming to help the DAO achieve sustainability. Understanding the DAO’s financial landscape is crucial for making informed business decisions.

Currently, there is no comprehensive method to effectively visualize the DAO’s dynamic financial positions. Available resources include:

  1. Karpatkey’s monthly reports on the Karpatkey-managed portion of the treasury.
  2. Defilytica’s balances of the DAO as a whole.

However, these resources do not offer an in-depth analysis of the DAO’s overall financial position over time or the flow of funds. Due to the protocol’s multi-chain nature, Balancer is unique in holding assets across various chains, including Mainnet, Arbitrum, and other L2s.

Therefore, Karpatkey proposes building and maintaining a financial system for the DAO Treasury. This system will facilitate Balancer’s integration with GAAP (Generally Accepted Accounting Principles) and enable the DAO to better understand its finances, leading to more informed decision-making. The GAAP used shall be determined by Karpatkey based on factors such as international acceptance and understanding, as well as difficulty of implementation.

Specification

Based on GAAP, every transaction since the DAO’s inception would be reviewed and categorized with specific labels (e.g., “Fjord LBP”) and categories (e.g., “Operating revenue”).
The categorized transactions would then be refined into the following information:

  • Balance statement (i.e., Initial vs. Final Balances and USD conversions).
  • Fund flow analysis.
  • Expenses breakdown (e.g., by Service Providers, Payroll, etc.).
  • Income breakdown (e.g., Swap & Yield fees, Fjord LBP, L2 fee, etc.).
  • Cash flow forecasting (TBD).

The reports will eventually be available on an interactive website, where users can filter and sort based on the desired timeframe for analysis. Until a satisfactory UI is developed, the reports will be delivered in PDF format.
Illustrations of the proposed outcomes can be seen in the following links:

Other concomitant responsibilities will include:

  • Integrating the bal_addresses repo for automatic indexing of all on-chain transactions in alignment with the DAO’s labels.
  • Reviewing the efficiency of the DAO’s financial structure and publishing findings/recommendations to optimize expenses, operational results, and treasury management.
  • Communicating with and supporting Balancer DAO to ensure the system can ultimately be used as a source of truth for potential taxes, legal, accounting, and other inquiries:
    • Conducting workshops with the Maxis to incorporate custom/technical details into the system.
    • Assisting future service providers, legal teams, and accountants in utilizing the system’s data and structure.

Budget

We propose a one-time grant of USD 20,000, fully payable in BAL, to Karpatkey for developing the financial reporting system.
Additionally, we propose a quarterly fee of USD 6,000, also fully payable in BAL, for maintaining the system, providing monthly reports, and publishing findings and recommendations. For the one-time grant, the amount of BAL to be disbursed will be determined based on the 90-day moving average price of BAL on the payment date. For the quarterly fees, the amount of BAL to be disbursed will be determined based on the 90-day moving average price of BAL on the last day of the third month of each quarter.

Furthermore, Karpatkey pledges to lock each payment in the veBAL contract for at least one year from the moment it is received in Karpatkey’s wallet.

ETH Address to Receive Funds: 0x58e6c7ab55Aa9012eAccA16d1ED4c15795669E1C

Next steps

We encourage the community to review and provide feedback on this proposal. Our goal is to develop a comprehensive and useful toolkit for the DAO and its community to leverage for gaining deeper insights into the DAO’s finances.

Below are the suggested future steps and timeline:

  1. Conduct a temp-check and review suggestions/feedback from the Balancer community.
  2. Request access to the Foundation/OpCos bookkeeping records.
  3. Collaborate with the Balancer Product team/Maxis to validate tags, labels, and other technical aspects of the system.
  4. Generate financial reports in PDF format on a monthly basis.
  5. Build and conduct user testing of the interactive UI.
  6. Present the demo UI/product to the community for final feedback.
  7. Deliver the UI and commence maintenance.

Termination

Balancer may terminate Karpatkey DAO’s engagement under this agreement for any reason through its Governance Mechanism. Karpatkey DAO may terminate this agreement upon four weeks’ notice, posted as a new discussion thread in the Balancer forum.
If the termination is requested by Balancer without at least a four-week notice, Karpatkey DAO will be granted an exit fee equal to the fees collected during the last two months, which will be paid in ETH. Regular fees will be collected until the day of termination.

Technical Specification

The Balancer DAO multisig 0x10A19e7eE7d7F8a52822f6817de8ea18204F2e4f will interact with BAL 0xba100000625a3754423978a60c9317c58a424e3d by writing transfer passing the specified karpatkey safe 0x58e6c7ab55Aa9012eAccA16d1ED4c15795669E1C as recipient and amount as 5205 BAL 5205000000000000000000.

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I have been advising @karpatkey in building out the first POC / UI demo described above. I am generally impressed and fully support this project for the following reasons:

  • as our treasury manager, @karpatkey already has the needed knowledge and context to create meaningful insights
  • DAO contributors summarized financial performance in quarterly reports based on data from sources like dune and Balancer Analytics with sufficient accuracy but that approach was always error prone and cumbersome. This approach fully indexes all activity on-chain and is automated
  • The reports will aid us greatly in analyzing the DAOs overall financial performance

I also like that the funding request is in BAL. It would be interesting to know if the received BAL will be locked? As an alternative, funding could also go through grants (cc @burns)?

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Full support.

The Balancer Foundation would rather take care of bookkeeping for the DAO, but having Karpatkey as a facilitator and service provider to such on-chain related accounting will only benefit our decentralization and strengthen the DAO, protecting it against jurisdiction overreach.

I’d only advise to add to the proposal there will be a service agreement signed between both entities, mimicking governance resolution.

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Thank you for your comments @Xeonus and @0xDanko.

karpatkey pledges to lock each payment for at least one year from the moment it is received.

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Hi everyone. The reports looks beautiful, but I do think there are two primary issues, that are partially interrelated:

  1. Accounting for liabilities
    The current model is not able to provide users with the understanding of expenses already incurred and/or committed but not yet paid. Basically, we propose to use a cash basis of accounting instead of accrual basis and this may result in that some stakeholders may be unaware of certain future payments and not able to account for them properly. This may have a minor or huge impact (i.e.liabilities related to compensation of funds lost due to a hack that has not yet been paid; or the amount of termination payment under the proposed terms above).
  2. Expense accounting
    Oftentimes, once funds are released to service providers there may no be not enough oversight and ability to reconcile expenses approved by DAO votes vs. funds distributed. If we use US dollar for denomination, it may become especially notable.
    Also, translation into US dollar is always a very interesting issue by itself because:
    beginning balance in tokens + period activity in tokens = ending balance in tokens
    But
    Beginning balance in USD + period activity in USD + translation variance in USD = ending balance in USD.
    I think these topics may require some additional thought.
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Also decomposition of the fund performance is usually very insightful for this type of reporting.

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Thanks for your valid points. Under the management of the Maxis, we tried to provide answers to these questions with our quarterly reports like this one. The goal is that we will work together with karpatkey to automate flagging of liabilities and runway forecast as best as possible.

What I also see as a challenge is how to account for allocated tokens like BAL that can be exposed to market volatility. That is something which we need to discuss as a group. Ideally, a breakdown of pure token allocations to SPs and an average price for a given quarter might be a good proxy of BAL token spending.

Another factor that has not been covered here is protocol health in terms of BAL emissions vs income vs spendings to service providers. I believe there is a potential middle ground where all these metrics can be easily visualized so they are more easily understandable by the community.

The DAO has strict accountability guidelines that are about to be voted in where SPs have to adhere to. Most SPs write monthly reports on their work and deliverables.
What I totally agree with is, that we need more transparent ways for individiuals to assess if a SP is performing or not. We are also working with karpatkey to potentially write up a guideline / framework to address that.

Goal is to have more clarity on all these topics before the end of Q3. I think the collaboration with karpatkey will aid us greatly in achieving that.

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As requested, the payment of 20’000 USD equivalent as 5025 BAL has been set up based on this query result for the 90d moving average price.

Upon agreement with @karpatkey contributors, future payments of 6000 USD equivalent in BAL will be requested on a quarterly basis via forum / proposals for record keeping (incl. payment payloads).

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https://snapshot.org/#/balancer.eth/proposal/0x58612ef5cd42d2fcd4ae114c9a9c28852e42ad431dd0edc1aef38cf8593429be

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Just wanted to raise up one last questions. Is it normal to include kinda “golden parachute” clauses for compensation at termination? Given that development is paid separately, I would argue intensively that the termination effect on the service provider is not commensurate with the benefits received at this event…

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The termination structure includes a 4-week notice period to ensure the SP can offboard smoothly. If termination is requested with shorter notice due to an emergency, the SP would not be held responsible and would receive a fee to cover the implications of the emergency termination. Given the tight collaboration between Karpatkey and Balancer DAO, the current compensation structure is designed to formalize accountability and ensure clarity for both parties. Hope this addresses your concerns.

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Could you clarify what are the implications that need to be covered? Is there any commitment to perform any activities specifically as a result of termination? Or are we talking about lost income as the only implication? In my humble opinion, termination fee is not appropriate. This allows to stop producing any reporting after 3 months but get paid for up to 5 months of work (i.e. 3 months for actually providing reporting + 2 months exit fee). I saw similar arrangement on Secret Network resulting in validators getting paid for a year of work but discontinuing services after 6 months.

1 Like